Checking Accounts May Have Fewer Consumer Safeguards than Credit Cards

Many consumers assume the terms of their checking accounts, the most widely used financial services product in the U.S., are simple, at least compared to such other payment methods as credit cards. But a study from the Pew Health Group shows that consumers are lost about their checking accounts, resulting in unnecessary overdraft fees and penalties.

Pew analyzed 265 checking accounts at 10 of the largest banks and found that the average checking account has a disclosure of 111 pages, an $8.95 monthly fee, an overdraft penalty fee of $35, an overdraft transfer fee of $10, and an extended overdraft penalty fee of $25 every seventh day the account is overdrawn, among other findings.

"What surprised us most is that it is so hard for consumers to understand their checking account," said Eleni Constantine, director of financial security at the Pew Health Group, the consumer-product safety arm of The Pew Charitable Trusts. "We didn't expect this lack of transparency."

She said that's especially dangerous when 9 out of 10 Americans have checking accounts.

The report, called "Hidden Risks: The Case for Safe and Transparent Checking Accounts," made a number of specific policy recommendations so that checking accountholders can experience a similar level of protection as credit card users have from high fees.

"Without that information indexed, it's really hard for consumers to figure out their checking accounts. It's important because if consumers can't understand, then they can't shop and can't shop properly," Constantine said.

A report from Moebs Services estimated that banks will take in a total of $38 billion in overdraft fees in 2011, the highest ever for the industry. The industry received $37.1 billion in revenue from overdraft fees in 2009.

To prevent consumers from unknowingly paying these fees, Pew recommended that banks have a single page disclosure box for their checking accountholders. Similarly, credit card companies are required by law to publish the "Schumer box," which requires companies to list in the same format their long-term rates, like annual percentage rate, or APR, and transaction fees. The box was named after Sen. Charles Schumer (D-N.Y.) who led the legislation enacted in the late '80s.

Pew's model disclosure box for checking accounts includes information like the minimum deposit needed to open an account, ATM fees, account closing fees, overdraft transfer and penalty fees and the posting order in which withdrawals and deposits are processed.

That last issue – transaction reordering – can be especially costly to consumers, said Constantine. Banks can maximize overdraft fees they collect based on which ordering method they choose. While most consumers expect banks to post transactions to their account in chronological order, Constantine said, banks may choose to process transactions from biggest to smallest, or withdrawals before deposits. Mathematically, both methods maximize fees consumers have to pay, said Constantine.

"We looked at what banks disclose," Constantine said, "and as of October, banks were saying, 'We can choose to reorder your transactions any way we want.'"

Constantine said that some banks noted in a survey in October that they post consumer transactions chronologically.

"Banks can do this voluntarily," Constantine said. "We fully support them and want them to do it."

Checking Account Fees: Banks Act Voluntarily

After the California court case of Gutierrez v. Wells Fargo, that bank began processing ATM and debit card transactions there in November in order from the lowest to the highest amount.

Beginning May 16 in the rest of the country, Wells Fargo will post ATM and debit card transactions for customers chronologically by date and time, according to Richele Messick, a spokeswoman for Wells Fargo. If that data is not available, Wells Fargo will post transactions from low to high. Checks and automated clearing house transactions, such as electronic funds transferring to pay some bills, will continue to post from high to low.

"We would like to see that apply across the board," Constantine said. "That is, legislation that requires banks post transactions to their accounts chronologically or in some neutral order that consumers can understand."

Constantine said Pew Health's goal is to have a bill to make consumer safeguards permanent for checking accounts. She cited the Consumer Financial Protection Act of 2010, which created the Bureau of Consumer Protection, and the Credit CARD Act of 2009.

"A bill is the most permanent and clearest way that reform takes place and sticks, but there are a lot of things that can be done by a lot of players to be done in the meantime. We don't have to wait for a bill to see progress here," said Constantine.

She said Pew will continue to share their findings with banks and credit unions.

"It should serve banks as well to have consumers well-informed about their products," she said.